Canada Should Draw Lessons from Mongolia’s Foreign Deal Confusion

Welcome? A worker puts a fresh coat of yellow paint on a new cafe that will open soon in a growing community surrounding the Oyu Tolgoi mine in Khanbogd, Mongolia. The country’s investment laws, however, have confused.

With two big foreign deals in the balance, Canada is now being advised by a Calgary think tank not to follow in the path of another resource-rich nation that’s recently scared off international investors: Mongolia.

In a paper, the Canadian Defence and Foreign Affairs Institute cited Mongolia’s failed attempt last spring to clarify foreign-investment rules, in light of deep-seated concern in the Asian country about the role Chinese state-owned enterprises should play in the resource-heavy economy.

Canada’s Conservative government is undergoing a similar process, promising to release “general” guidelines on future foreign takeovers, at or around the same time it issues its much-anticipated rulings on two key energy deals: Cnooc Ltd.'s $15.1 billion planned purchase of Nexen Inc.; and the proposed $5 billion-plus deal for Progress Energy Resources Corp. led by Malaysia’s Petronas.

Mongolia policymakers implemented a law that requires a government review of foreign-led investments in sectors deemed to have “strategic importance,” including mining, banking and media. But it’s been difficult to decipher. In September, Beijing-controlled Chalco withdrew a bid for a miner there on concerns about getting Mongolian government approval.

Mongolia’s approach has “significantly raised the risks for foreign investors,” the paper argues, claiming a number of foreign investors have reportedly withdrawn from proposed resource projects. That should be a wake-up call for Ottawa, the report’s authors say. The pending foreign-takeover guidelines from Ottawa must bring some “predictability” to rules regarding state-owned enterprises to avoid a Mongolia-like quagmire, the authors argue.

To date, Canada’s record has been spotty, the paper said. The Cnooc review and the promise of clarity on foreign investment rules–a pledge first made in 2010 after BHP Billiton 's failed bid for Potash Corp. of Saskatchewan–have taken too long.

“As we have seen in the case of Mongolia, resource nationalism can trigger knee-jerk reactions bordering at times on the irrational,” the paper’s authors said. “Mongolia’s current resource policy is an example of getting it wrong. Let’s hope that Canada gets it right.”

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